Vodafone 2006 Annual Report Download - page 64

62 Vodafone Group Plc Annual Report 2006
Board’s Report to Shareholders on Directors’ Remuneration
continued
Each element of the reward package focuses on supporting different Company
objectives, which are illustrated below:
Purpose Performance Measure(s)
Base salary • Reflects competitive market •Individual contribution
level, role and individual
achievement
Annual • Motivates achievement of •Adjusted operating profit
deferred annual business KPIs •Free cash flow
share bonus •Provides incentive to co-invest •Total service revenue
•Motivates achievement of •Customer satisfaction
medium term KPIs •Adjusted EPS growth on share
•Aligns with shareholders deferral
Share options •Incentivise earnings growth •Adjusted EPS growth
and share price growth
•Aligns with shareholders
Performance •Incentivise share price and •Relative Total Shareholder
shares dividend growth Return (“TSR”)
•Aligns with shareholders
The principles of the Policy are cascaded, where appropriate, to executives below Board
level as set out below:
Cascade of policy to Executive Committee
Base salary Set against national market
Annual Deferred Target bonus level competitive in local market,
Share Bonus payout conditional on business performance
relevant to individual executive
Opportunity to defer bonus to be extended to
Executive Committee members based overseas
in 2006
Long Term Incentive Annual awards of performance shares and share
options with performance conditions
Report on Executive Directors’ Remuneration for the 2006
Financial Year and Subsequent Periods
Total remuneration levels
In accordance with the Policy, the Company benchmarks total remuneration levels
against other large European domiciled companies, using externally provided pay data.
Total remuneration for these purposes means the sum of base salary and short, medium
and long term incentives. The European focus was selected because Europe continues
to be Vodafone’s major market and the Company is one of the top ten companies in
Europe by market capitalisation. The competitive data is used as one input to determine
the remuneration level of the Chief Executive and Board. The Committee also takes into
account other factors, including personal and Company performance, in determining
the target remuneration level.
Components of executive directors’ remuneration
Executive directors receive base salary, short and medium term incentive (annual
deferred share bonus), long term incentives (performance shares and share options) and
pension benefits. Vesting of all incentives is dependent on the achievement of
performance targets that are set by the Remuneration Committee prior to the awards
being granted.
Base salary
Salaries are reviewed annually and adjustments may be made to reflect competitive
national pay levels, the prevailing level of salary reviews of employees within the Group,
changes in responsibilities and Group and individual performance. External
remuneration consultants provide data about market salary levels and advise the
Committee accordingly. Pension entitlements are based only on base salary.
Incentive awards
Short and medium term incentive: annual deferred share bonus
The purpose of the annual deferred share bonus is to focus and motivate executive
directors to achieve annual business KPIs that will further the Company’s medium term
objectives. Awards made in July 2003 under the Vodafone Group Short Term Incentive
Plan (“STIP”) vested in July 2005. Details of STIP awards are given in the table on page 66.
The Company has reviewed the current STIP in light of changes to US tax legislation and
will make future awards under the Vodafone Global Incentive Plan Rules approved by
shareholders in 2005. This will enable the plan to be operated for members of the
Executive Committee based overseas. Whilst the mechanics of the plan will change, the
quantum of awards will remain the same.
The STIP comprises two elements: a base award and an enhancement award. Release
of both elements after three years is dependent upon the continued employment of
the participant.
Base award
The base award is earned by achievement of one year KPI linked performance targets
and is delivered in the form of shares. The target base award level for the 2006 financial
year was 100% of salary with a maximum of 200% of salary available for exceptional
performance. From 2006, the base award will be deferred into shares, net of tax.
The Remuneration Committee reviews and sets the base award performance targets on
an annual basis, taking into account business strategy. The performance measures for
the 2006 financial year relate to adjusted operating profit, total service revenue, free
cash flow and customer delight. Each element is weighted according to the
responsibilities of the relevant director. For the Chief Executive, in the 2006 financial
year, the adjusted operating profit target was 30% of the total, total service revenue
35%, free cash flow 20% and customer satisfaction 15%, and the payout achieved was
118.7%. The targets are not disclosed, as they are commercially sensitive. For the 2007
financial year, no changes will be made to the performance measures or weightings.
More information on Company performance against KPIs in the 2006 financial year can
be found in “Key Performance Indicators” on page 29.
The Group may, at its discretion, pay a cash sum of up to the value of the base award in
the event that an executive director declines the share award. In these circumstances,
the executive director will not be eligible to receive the enhancement award or any
cash alternative.
Enhancement award
An enhancement award of 50% of the number of shares comprised in the pre-tax base
award is earned by achievement of a subsequent two year EPS performance target
following the initial twelve month period. For awards made in the 2006 financial year,
which will vest in July 2007, the performance measure related to growth in adjusted EPS.
Three quarters of the enhancement award will vest for achievement of EPS growth of
11% rising to full vesting for achievement of EPS growth of 16% over the two year
performance period.
Long term incentives
Awards of performance shares and share options were made to executive directors
following the 2005 AGM on 26 July 2005. The awards for the 2006 financial year will
be also be made following the AGM.
Awards in the 2006 financial year were made under the Vodafone Group Plc 1999 Long
Term Stock Incentive Plan. Awards of performance shares and options in the 2007
financial year will be made under the Vodafone Global Incentive Plan.
Awards are delivered in the form of ordinary shares of the Company. All awards are made
under plans that incorporate dilution limits as set out in the Guidelines for Share
Incentive Schemes published by the Association of British Insurers. The current
estimated dilution from subsisting awards, including executive and all-employee share
awards, is approximately 2.6% of the Company’s share capital at 31 March 2006 (2.4% as
at 31 March 2005).
Performance shares
Performance shares are awarded annually to executive directors. Vesting of the
performance shares depends upon the Company’s relative TSR performance. TSR
measures the change in value of a share and reinvested dividends over the period of
measurement. The Company’s TSR performance is compared to that of other companies
in the FTSE Global Telecommunications index as at the date of grant, over a three-year
performance period.
In the 2006 financial year, the Chief Executive received an award of performance shares
with a face value of two times base salary; the Deputy Chief Executive and other
executive directors one and a half times their base salary.
Performance shares will vest only if the Company ranks in the top half of the ranking
table; maximum vesting will only occur if the Company is in the top 20%. Vesting is also
conditional on underlying improvement in the performance of the Company. Awards will
vest to the extent that the performance condition has been satisfied at the end of the
three-year performance period. To the extent that the performance target is not met, the
awards will be forfeited. The following chart shows the basis on which the performance
shares will vest: